If you are looking to buy your first house, but have soured on the idea after having looked at the significant monthly price of a home mortgage then this is worth a read. Lately the big item on the minds of many is the decision to go forward with a home purchase or wait. Right now, I see more people waiting for rates to change, but in reality so many other factors come into play.
This article covers many elements of buying a home, and other often overlooked considerations that one should consider before buying. We also cover an example of a mortgage payment and general rules of thumb for purchasing a home.
Traditional Average Mortgages Rates
Mortgage rates remain elevated a bit higher than previous averages, but seem much higher due to the recency of an astronomically low rate period during the COVID-19 pandemic. Most recently, a 15 year mortgage rate average has hovered around 6.7%, while a 30 year is around 7.3%. As of December 2023, mortgage rates have begun to tumble and have continued to decline into January.
Other important factors:
Your Personal credit history
While a credit score is generally not paramount to long term financial success, credit history helps with your initial home purchase, as typically a mortgage may be the largest and most significant debt instrument you have. Ensure any credit card payments or other debt obligations are paid on time. If you are in the fortunate position to make a purchase of a home without debt this isn’t as relevant.
Your current savings level
It is important to ensure that you have a proper emergency fund in place, and ample savings made to purchase a home. While not always feasible, getting to a 20% down payment is ideal to avoid extra cost in PMI (Covered later). To determine a 20% down payment, you need simply to divide the desired home price by 5.
Also consider how much money is going towards interest, insurance, taxes, and PMI compared to a rental, when factoring in the idea of money going towards equity in a home. Sometimes this can exceed rent costs making a home purchase not advisable.
Getting pre-approved is always a good call prior to buying a home. Navigate Financial Planning can also help you estimate how much home you can afford as a second opinion.
Your local market trends
Be mindful of local trends for your home purchase. Redfin has a useful tool for looking at this. More competition may push a quicker decision on a home purchase.
Your lifestyle needs
What do you enjoy in your freetime? Do you have kids? Planning to start a family? Have a desire to be near schools or parks? These are also important questions to consider as more desirable areas will often have higher prices associated with homes.
Your job security and career goals -
This is the most overlooked aspect, in my opinion. A layoff, demotion, or some other adverse job event can create an instant stressor as that mortgage payment becomes more challenging to pay in the event of income loss. Consider the industry you are in, too, in case there are relocation possibilities, or if it is a high turnover industry.
Other Home Costs to Consider:
PMI - Typically 1-2% of overall loan. This is only a cost when one does not include 20% down on the home. For example, a $400,000 home would require a down payment of $80,000 to avoid PMI, however PMI would not be a factor once the amount owed on the house exceeds 20% of the home value.
Moving costs - These vary somewhat but can easily cross $1,000 for smaller moves, and $10,000 for a larger move. If upgrading space, you will likely have furniture needs and potentially outdoor home/garden costs.
Home repairs - There may be necessary home repairs needed at the onset of moving in. Sometimes, you can negotiate with the seller to take care of these, but negotiation has its limits.
Property Tax - This is based off of your home’s assessed value (Which may differ in each state)
State specific taxes and costs
Example of Home Mortgage:
Here is an example of the total costs one can expect to pay monthly:
$800,000 - Home Price
20% Down Payment ($160,000)
15 Year Mortgage
Monthly Payment: $5,575
Home Insurance - Additional cost depending on location, size, and other risks associated with the home. May be around $150-170 per month.
Property Tax $667 (Assumes 1% of home purchase price)
More flexibility to make upgrades and changes to the home.
Start building some equity into property.
Tax advantages for selling the home in future.
Ability to possibly rent out space in home depending on state/city restrictions
Better suited for starting a family.
Will be more costly at first.
Unexpected home repairs
Harder to move and less control of supply/demand and value of the home.
Example of Renting:
3 Bedroom apartment
$2,800 monthly rent / $33,360 yr
Possible other fees such as a garage space
Utilities Cost ~$200
Flexibility in moving
Less expensive to insure and may be less expensive overall allowing for greater monthly cash flow
Less difficult to maintain
Lack of ownership means no equity ownership.
Not able to control rent prices.
Other renters may be burdensome.
Too often I see people follow the path of buying a house/build equity without first considering all variables at play, and instead focus on the idea/dream of homeownership. Sadly, this is a bit more difficult today compared to previous decades albeit not impossible, and sometimes is the best route to consider. Ultimately, home ownership we believe is still superior to renting in the long run, but it always depends on your unique circumstances. Most importantly, reframe thinking in regards to home ownership so that one considers the route that will give them the most financial flexibility and efficient route for future financial success.